Bullish child boomers are serving to to gasoline the glowing M&A marketplace for small companies
People enjoy a stroll down historic Annapolis Main Street in Annapolis, Maryland on April 29, 2021.
Marvin Joseph | The Washington Post | Getty Images
For Mitch Hughes, CEO of Vizz, a construction management software company he founded in 1996, the pandemic created ideal conditions for acquisitions.
Vizz, which operates a visualization platform that allows developers to create realistic virtual models, wasn’t very present on the manufacturing side. On the other hand, Manufacton had software for the modular structure, compatible software and a “dream team” of people. However, as a relatively small, young company, it didn’t have the traction needed to respond to the sudden surge in demand.
“Covid created a hurdle for them, but it created an opportunity for us,” said Hughes. At the beginning of this year, Vizz took over Manufacton and kept all employees.
While many baby boomer-owned small businesses have been hit hard by the pandemic, there is also a large cohort of boomer businesses that have taken advantage of the pandemic and are seeing low interest rates to expand.
According to a study by the New York Fed and the AARP, older entrepreneurs aged 45 and over entered the pandemic with a larger financial cushion than their younger counterparts. This pillow is more important than ever when the world is turned upside down. According to a survey by BizBuySell, an online marketplace for sale, 30% of buyers are baby boomers.
More from CNBC’s Small Business Playbook
A pandemic seems like an odd time for a booming M&A market. Many small businesses have suffered and many have failed. The data shows that government support did not flow adequately through the system either. The latest poll from CNBC | SurveyMonkey Small Business for the second quarter of 2021 found that many entrepreneurs expect better business conditions and higher revenues, despite overall negative net confidence and widespread fears of a tight labor market and rising cost of goods.
However, some business and investment experts say business owners run a huge risk of not being bullish enough after the pandemic. The brokers found that low interest rates, PPP loans, and other government support have helped fuel acquisitions for entrepreneurs able to take advantage of the terms.
“They see a way they can buy a business and get really great credit. There are just a lot of options. Lots of credit,” said Andrew Cagnetta, general manager of Transworld Business Advisors in West Palm Beach, Florida.
Main Street deal prices are rising dramatically
Prices have risen dramatically as a result of the bullish business buy. According to the NFIB Small Business Optimism Index, the net percentage of owners who increased average sales prices rose 10 points to 36%. This is the highest since April 1981 when it was 43%. In its quarterly report, BizBuySell said the median sales price for the first quarter was $ 350,000, up 30% year over year.
“It’ll sound crazy, but last year was my best year yet,” said Sheila Spangler of Murphy Business Sales in Boise, Idaho, which primarily focuses on companies less than $ 2 million worth. She adds that this year is also “super busy”.
Of course, the price fluctuations vary greatly depending on the region and industry. Cagnetta said he saw average sales prices double over the past year.
I’ve done business for other people for most of my career. I’ve always felt that if I can run a business for them, I’m pretty sure that I can run a very successful business myself.
Kevin Glass, the new Pinch a Penny Pool Patio Spa franchisee
Buyers tend to be more numerous than sellers, but the pandemic has exacerbated this. Cagnetta said he has seen growth in some categories of buyers. There are buyers from private equity and SPAC (Special Purpose Acquisition Corporation). Then there are entrepreneurs who are already doing well and who want to expand. Another emerging group is boomer buyers who were previously corporate employees. The pandemic forced many to rethink their lives – either because of layoffs or because of rethinking priorities. The same trend occurred after the Great Recession a decade ago when there was a “wave of confusion,” said Bob House, president of BizBuySell. “People are turning to business ownership for a living, rather than a kind of resetting,” said House.
Kevin Glass became a franchisee of Pinch a Penny Pool Patio Spa in Conroe, Texas after vacationing at the beginning of the pandemic. After 35 years in the oil and gas industry, Glass was already thinking about the next chapter of his career. He knew he was in a vulnerable position before the pandemic and had been looking for options. As soon as he was on leave, that search shifted into high gear.
Glass says he received a retirement benefit package when he was released but was unable to move on with his current lifestyle. He used the pension package to finance the company acquisition. Glass specifically researched franchises based on the support of an established business model. He also took into account the resale value. Pinch a Penny’s fixed income financing program further sweetened the deal.
“I’ve done business for other people for most of my career. I’ve always felt that if I can run a business for them, I’m pretty sure that I can run a very successful business myself,” said Glass.
Business areas in which business is booming
While the number of transactions has not yet reached pre-pandemic levels, it is starting to increase, especially for companies that have done well throughout the pandemic, such as: B. Liquor stores, home improvement stores, e-commerce websites, medical companies, manufacturers and distributors. Still, brokers say the expected transfer of generational wealth with boomers selling their businesses has not yet happened.
It is not necessarily the children of boomer owners who buy. Boomer entrepreneurs usually pass their businesses on to their kids, but some find that their kids don’t want the business. According to a survey by Guidant and the Small Business Alliance, boomers make up 41% of small business owners or franchisees, followed by Gen X at 44%.
“The seller’s tsunami has not yet happened,” said Cagnetta. “Business was very good until the pandemic broke out, then everyone was on hold. But I think they are coming out now to sell,” he added.
One important factor brokers have pointed out is an expected tax hike. Biden’s tax proposals would increase taxes on capital gains by more than $ 1 million. The plan provides an exemption for small businesses as long as they remain family-owned and operated. While it’s too early to say how the plan will work or if it will be implemented, brokers say it is putting pressure on business owners to sell.